Pod Insights The Founders Podcast #32 Alibaba: The House That Jack Ma Built About this episode What I learned from reading Alibaba: The House That Jack Ma Built by Duncan Clark.
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Crazy Jack (0:01)
The internet is filling the void created by state planning (6:59)
Jack has made a career out of being underestimated: “I am a very simple guy. I am not smart. I might have a smart face but I’ve got very stupid brains.” (20:35)
Jack’s early life / Discipline and Curiosity (24:43)
Jack Magic: “ Nobody saw the opportunity in this business. We didn’t make much money at first, but Jack persevered…I respect him tremendously for he has a a great ability to motivate people and he can invest things that seem hopeless with exciting possibility. He can make those around him get excited about life.” (40:00)
Jack’s first time on the Internet (47:06)
Another lucky break: Meeting Yahoo Founder Jerry Yang (55:45)
Making money from shrimp (57:02)
The worst deal he ever made (1:00:43)
Masayoshi Son: Founder of Softbank (1:04:45)
Be the last man standing (1:10:16)
Ebay vs Alibaba: A case study in what not to do (1:13:32)
Yahoo’s billion-dollar bet (1:23:00)
Jack’s unique reaction to the financial crisis (1:27:00)
Alipay’s ownership changes / One of the craziest stories I’ve read (1:33:12)
If I had another life, I would keep my company private (1:46:10)
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Transcript Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
0:00 David Senra? I first met Jack in the summer of 1999, a few months after he founded Alibaba in a small apartment in Hangzhou, some hundred miles southwest of Shanghai. On my first visit, I could count the number of co-founders by the toothbrushes jammed into mugs on a shelf in the bathroom. In addition to Jack, there included his wife Cathy and 16 others. Jack and Cathy had wagered everything they owned on the company, including their home. Jack's ambition then, as it remains today, was breathtaking. He talked of building an internet company that would last 80 years, the typical span of a human life.
0:42 David Senra? A few years later, he extended Alibaba's life expectancy to 102 years, so that the company would span three centuries from 1999. From the very beginning, he vowed to take on and topple the giants of Silicon Valley. Within the confines of that modest apartment, this should have seemed delusional, yet there was something about his passion for the venture that made it sound entirely credible. Jack is different from most of his internet billionaire peers. He struggled in math as a student and wears his ignorance of technology as a badge of honor. His outsized ambitions and unconventional strategies won him the nickname Crazy Jack.
1:25 David Senra? In this book, we will explore his past and quirky personality to learn the method to his madness. Okay, so that's from the introduction of the book that I want to talk to you about today and what we're going to be using as our guide to learn more about Jack Ma. And that book is called Alibaba: The House That Jack Ma Built by Duncan Clarke. So I've heard of Jack Ma before and I've seen a couple of his speeches, but I didn't know too much about Alibaba's business. I've read a few articles and heard a few podcasts, but this book really kind of opens up exactly what they do and how they make their money. Next few paragraphs, it kind of describes the scale that we're talking about here. On November 11, 2015, in Beijing,
2:10 David Senra? in the iconic bubble-like structure bathed in blue light, known popularly as the Water Cube, the venue for the aquatics events in the Beijing Olympics held seven years earlier. It wasn't water that flowed, but streams of data. For 24 hours without interruption, a huge digital screen flickered with maps, charts, and news crawls, reporting in real time the purchases of millions of consumers across China on Alibaba's websites. In front of hundreds of journalists broadcasting the event across China and around the world, the Water Cube had been repurposed as a mission control for the Chinese middle class and the merchants marketing to them. A four-hour live TV special,
2:55 David Senra? called the 1111 Global Festival Shopping Gala, was broadcast to help keep shoppers up until midnight. In the first... now, here's the crazy part. In the first eight minutes of 111115, shoppers made more than $1 billion in purchases on Alibaba sites, and they kept on shopping. 24 hours later, 30 million buyers had racked up over $14 billion in purchases, four times greater than 1111's US equivalent, Cyber Monday. So they did $14 billion worth of purchases in 24 hours. Let's find out a little bit about all the products and the websites
3:39 David Senra? that Alibaba owns. So the note I left myself was 1,001 mistakes and what this author is calling the Iron Triangle. And we're going to see some of Jack's personality right away. Jack likes to say that his company's success was an accident. Quote, "Alibaba might as well have been known as the 1,001 mistakes." In its early years, he gave three explanations as to why the company survived. "We didn't have any money, we didn't have any technology, and we didn't have a plan." But let's look at the three real factors that underpin Alibaba's success today: the company's competitive edge in e-commerce, logistics, and finance.
4:21 David Senra? Alibaba's e-commerce sites offer a variety of goods to consumers. Its logistics offering ensures that those goods are delivered quickly and reliably, and the company's finance subsidiary ensures that buying on Alibaba is easy and worry-free. The e-commerce edge. Unlike Amazon, Alibaba's consumer websites, Taobao and Tmall, carry no inventory. So let me just preface the beginning of this podcast. I can barely pronounce most words in English. There's no way I'm gonna get any of these words correctly. So I'm gonna do the best I can, but I'm most likely mispronouncing them. So we're first introduced to their two main sites.
5:02 David Senra? So it's Taobao, T-A-O-B-A-O, and Tmall. Carry no inventory. They serve as platforms for other merchants to sell their wares. Taobao consists of nine million storefronts run by small traders or individuals. Attracted by the site's huge user base, these micro merchants choose to set up their stalls on Taobao in part because it costs them nothing to do so. Alibaba charges them no fees. But Taobao makes money, a lot of it, from selling advertising space, helping promote those merchants who want to stand out from the crowd. Merchants can advertise through their paid listings or display ads.
5:45 David Senra? Under the paid listing model, similar to Google's AdWords, advertisers bid for keywords to give their products a more prominent placement on Taobao. They pay Alibaba based on the number of times consumers click on their ads. The old joke about advertising is, "I know at least half of my advertising budget works. I just don't know which half." But with pay-per-performance advertising and a ready market of hundreds of millions of consumers, Taobao commands an enormous appeal to small merchants.
6:14 David Senra? So Taobao, they sell advertising space that's how they make their money. On Tmall, they actually get a percentage of everything sold. And so the way the book describes it, and a good way to, like a mental shortcut to think about this is, Taobao is like these micro merchants that can sell anything, where Tmall is like, large companies like Nike, Gap, L'Oréal, and they cough up about a 3% to 6% of the sales price to Tmall. Okay, skipping ahead a few pages before I go on to the logistics and the financial part of Alibaba, I noticed something that's really interesting to me, and it's "The Internet is Filling the Void Created by State Planning." So I just want to share a couple of examples of that with you real quick.
6:58 David Senra? Despite massive construction of shopping malls, supermarkets, and corner stores, China's offline retail penetration is still extremely low. For every person in China, there are only 6 square feet of retail space, less than 1/4 of the space in the United States. China will likely never close that gap, and why should it? Traditional retail is hardly a paragon of efficiency. With the burdens of inventory and rental costs, offline stores are rapidly losing sales to online players in many product categories. In China today, some shop owners are too busy taking care of customers online to bother with those who actually wander into their store.
7:40 David Senra? Many vendors in China have simply dispensed with the shop entirely. Why rent an expensive space that is only open at most half of every day when your Taobao storefront is open 24/7? Nature abhors a vacuum, and in China, the internet is filling the voids created by a legacy of state ownership and state planning. That's why shopping online in China is even more popular than in the West. Jack summed it up. "In other countries, e-commerce is a way to shop. In China, it's a lifestyle." Groceries are another popular category because as Jack explained, "Supermarkets in China were terrible. That's why we've come out on top."
8:24 David Senra? End quote. Already more than 40% of Chinese consumers buy their groceries online as compared to just 10% in the United States. And so I went to Whole Foods to get some groceries and I noticed that now Amazon Prime members can get free grocery delivery within two hours. And it kind of reminded me of this story that's in the book, "The Everything Store", where Jeff Bezos wants to buy, at the time, diapers.com. And the founders of diapers.com, they have no interest in selling. So they meet with them, but they don't work out a deal because they're just not interested in selling and they want to keep growing the company. And so Jeff responds with saying, "Okay, that's fine." Because you know, one of his most famous sayings is, "Your margin is my opportunity."
9:08 David Senra? So what he does is all the products like diapers and the rest of the stuff, similar things that you would need for childcare when you have a baby, which was obviously diapers.com's main market, he just slashed the prices and started selling at a loss and just bled diapers, bled them out until they agreed to sell. So I thought of that when I saw that now they're offering free grocery delivery because the main competitor there is the business Instacart. Anytime you're in a Whole Foods, at least where I live, you see tons of Instacart employees. And I've used Instacart a few times, but I was like, "This is ridiculous." Not only do they charge a fee, and then you obviously want to be a good person and tip
9:49 David Senra? the delivery person, but then they add additional percentages on some of the stuff you buy. Where when you're doing it directly through Amazon, since they own Whole Foods, they sell it to you for what you would in the store and they charge you nothing. And I just picture Jeff Bezos sitting somewhere and be like, "Oh, that's a nice business you have there, Instacart. It'd be a shame if anything happened to it." So I have a feeling, and I guess why I brought that up here is because 40% of Chinese consumers buy their groceries online as compared to just 10% in the United States. I don't know if those numbers are what they look like today because this book was from 2014, 2015. But I do think with similar opportunities like the one Amazon is doing with Whole Foods, that number is definitely going to increase.
10:35 David Senra? Okay, so let's skip ahead a few pages. They talk about the logistics edge, and this part was actually a little confusing for me. So the note I left on the next page is what would you do? Which strategy would you pick? And let's just, I don't see how this is an edge, I guess, for Alibaba yet. Okay, so this is on Singles Day 2015, and that's the 11/11. It's the actual event, it's called Singles Day. So on that day, orders placed on Alibaba's websites generated 467 million packages, requiring more than 1.7 million couriers and 400,000 vehicles to deliver the goods. China today has a veritable army of couriers, on foot, bicycles, electronic bikes, trucks,
11:16 David Senra? and trains, and they are the unsung heroes of the country's e-commerce revolution. Chinese consumers spent more than $32 billion on package delivery in 2014. So the numbers in this book just blow my mind. I mean, there's more people using the internet in China today than there is, than the actual amount of citizens living in the United States. So the number increased by more than 40% in a year, but the volume is set to grow dramatically in the years ahead. On, and then here's what I mean, on average, less than one package per month is delivered for every person in China. Without the low-cost delivery that the courier services provide, Alibaba would not be the giant it is today.
11:59 David Senra? To survive in a cutthroat industry, some of the courier firms have adopted clever methods to keep costs at rock bottom. In Shanghai, for instance, couriers shuttle back and forth on the subway, passing packages over the barriers to one another to avoid buying multiple tickets. And this is what I mean, that's a little confusing. But none of these couriers are employed by Alibaba itself. Most of the packages in China are delivered by private couriers. So Alibaba doesn't employ them directly, they invest in some of these companies, though. Like, there's one called Keneo. And which I invested in. And this is what I mean by which strategy would you pick?
12:39 David Senra? So it says, "By investing in Keneo, Alibaba aims to lock in vital relationships with its logistics partners while finding outside investors to fund the expansions of the network themselves. Keneo neither owns the physical infrastructure of the network, nor employs the personnel who make the deliveries. Those assets are contributed by the consortium's members and partners, allowing Alibaba to pursue a 'asset-light' strategy." A lot is riding on this approach. Alibaba's principal e-commerce competitor JD.com is pursuing an asset-heavy strategy, investing directly in its own logistics infrastructure. JD's mascot
13:20 David Senra? is Joy, a gray metallic dog chosen no doubt to give symbolic chase to Tmall's black cat. Today JD has built up the largest warehouse capacity of any e-commerce company in China, offering speedy delivery services including same-day delivery in 43 cities. Sound familiar? JD.com runs a truly end-to-end system, controlling its own procurement, inventory, distribution, and warehouse systems, with goods delivered to customers by uniformed couriers riding JD-branded vehicles. So, right now, in the United States, you see Amazon is kind of a mixture of these two. But they're clearly, Amazon's clearly moving from an asset-light
14:03 David Senra? quote-unquote strategy to an asset-heavy. You can see that with the purchase of planes, and they have now the Amazon trucks. Some of the Amazon packages that I get delivered are delivered by UPS, but also a good amount are starting to be delivered by subcontractors that are contracted directly from Amazon. So if I had to guess, they clearly want to, if you can tell by Jeff Bezos' history, he seems to be a big fan of vertical integration. And if you remember the podcast on Rockefeller, Rockefeller had a lot of these strategies too, where he starts out, he gets a wedge into an industry, then he starts with oil refineries, then he starts to buy up his competition. So he's now dominant, had the
14:44 David Senra? dominant position in his industry, similar to how Amazon I think now is over like 50% of all e-commerce in the United States. And then eventually, he wants to control logistics, he wants to control everything from top to bottom, which I think is what Jeff is doing as well. So, the book is writing that this is an actual... An edge, they call it the logistics edge to Alibaba, and I'm not sure that's accurate. Especially because Alibaba is now reading up on the internet industry in China, there seems to be a duopoly between Alibaba and Tencent. So, again, I don't know if that's still accurate today. I'd be very curious how many packages are delivered, like what percentage are actually
15:27 David Senra? delivered directly by Alibaba and the companies it owns as opposed to just relying on an asset-based strategy. Again, it makes more sense when you're starting out maybe to do that, but Alibaba is a massive company now. So, okay, so let's go to the finance edge. And very similar to, we talked about this a little bit with the Elon Musk podcast with PayPal, they have this product called Alipay. And here's the weird part, though, and I want you to remember this part for later in the podcast because this is going to come up. And it's one of the strangest stories I've ever read. So, the quote I left myself, "No longer owned by Alibaba." "The final edge in the iron triangle is finance.
16:08 David Senra? In financial services, Alibaba's most important asset is Alipay, its answer to PayPal. By far the most popular online payment tool in China," which actually that now it's, there's the payment system that WeChat, Tencent owns for WeChat, is actually, I think, larger than Alipay is now, if I'm not mistaken. "Alipay handles more than 3/4 of a trillion dollars a year in online transactions, three times the volume of PayPal, and 1/3 of the 2.5 trillion global online payments market." And this is the weirdest part. "No longer owned by Alibaba, Alipay is the largest asset of a company controlled personally by Jack." So I'm not going to get into that now because the story unfolds later on and it makes more
16:53 David Senra? sense at the end, but just remember because it is bizarre. And I would also say the the parallel here to PayPal is imprecise because they do a lot more. It's almost like it's turning into like a virtual wallet and a bank. Let me give you an example. They have their own mutual fund. So check this out. Offering much higher returns on deposits than the meager returns paid by the banks, Alibaba's Yubei Online Mutual Fund proved so popular when it launched in 2013 that it stirred China's stagnant financial service industry into a frenzy of activity. Yubei, whose name translates in English as Savings Balanced Treasure, sounds innocuous enough, a place
17:35 David Senra? to deposit your loose change. But when it launched, Alibaba set no limits on the amount consumers could deposit. Not only were the rates offered much higher than the banks, as much as two percentage points higher, but Yubei allowed customers to make withdrawals at any time without penalty. As a result, individual consumers transferred tens of thousands of hundreds of thousands into the fund. That's tens or hundreds of thousands, sorry. The banks became alarmed at the outflows. By 2014, Yubei had attracted over $93 billion
18:16 David Senra? from 80 million investors, more than the combined total accounts of all other money managers in China. The inflow was so huge that in only 10 months, Yubei was ranked as the fourth largest money manager in the world, closing in on global industry stalwarts such as Vanguard, Fidelity, and JP Morgan. So you can clearly see the analogy to PayPal. It's imprecise. So what I, a lot of the book goes into and what I want to spend a good amount of the podcast on is, like in all these stories, is learning about the personality of the person.
18:58 David Senra? The actual founder. So this is the personality of Jack Ma. And then I'm going to get into, which is amazing to me is
19:07 David Senra? his early life, like how he started out. Okay, so we're still in like present day. So it says, "One of the most circulated images of Jack on the internet is a photo of him sporting a mohawk, nose ring and makeup, including jet black lipstick. On that occasion, a celebration of Alibaba's 10th anniversary, Jack sang Elton John's "Can You Feel the Love Tonight" to a stadium full of 17,000 cheering employees and 10,000 other spectators. Jack combines a love of showmanship with a relish for defying stereotypes. Where other business moguls like to talk up their own connections or academic credentials, Jack enjoys talking down his own.
19:50 David Senra? "I don't have a rich or powerful father, not even a powerful uncle. Having never studied abroad, he likes to describe himself as 100% made in China. He stands out as a tech company founder with no background in technology. At Stanford University in 2013, he confessed, "Even today, I still don't understand what coding is all about. I still don't understand the technology behind the internet." Jack has made a career out of being underestimated. "I am a very simple guy. I am not smart. Everyone thinks that Jack Ma is a very smart guy. I might have a smart face, but I've got very stupid brains." So the book asks the question, like, is this, is this actual, is like, is he a dumb guy?
20:35 David Senra? Is that even possible? Most likely, it's just an act. So it says, "His achievements have proved otherwise. This dumbing down is of course just a feint." Jack once explained that he loves, this is hilarious, that he loves the lead character of the movie Forrest Gump, because people think he is dumb, but he knows what he is doing. On the first day of trading, on the first day of trading of Alibaba's shares, Jack was interviewed by CNBC live on the floor of the New York Stock Exchange. When he was asked which person had most inspired him, Jack replied without hesitation, "Forrest Gump." His interviewer paused and then said, "You know, he's a fictional character, right?"
21:17 David Senra? So, we're gonna go into his mission, and this is Jack's mantra. Just like, there's these, I would say sayings or ideas that are repeated constantly. You see this a lot with founders, so in Jeff Bezos' case, they're called Jeff-isms. I call these Jack-isms, because they're repeated constantly. And, he kinda just has...
21:40 David Senra? He, how can I describe this? So, if you watch, so I watched a bunch of his speeches. And what's remarkable about him is, he basically tells the same speech every time with different variations. So, it's almost like he's working off a script that he just repeats and he knows. So, perhaps the most famous lesson of Jack, the teacher, they call him the teacher because that was his first job, is known by heart by every Alibaba employee. Customers first, employees second, and shareholders third. Jack describes this as Alibaba's philosophy. When asked by the journalist Charlie Rose if he saw himself as an apostle for small business, Jack agreed. "I'm a strong believer. It's my religion."
22:22 David Senra? Many small businesses in China don't just use Alibaba's websites as a marketing channel. They depend entirely on them to make a living. Jack has always insisted on offering most of Alibaba's services for free. Before I continue this whole thing of being an apostle, I've referenced that on the podcast as being an evangelist. I'm definitely an evangelist for small business and a strong believer. Not only is it because I've been interested in it my whole life, but now I just see it almost as a necessity, as like a way of being pragmatic. If you're living in a country where wages have basically been stagnant for 40 years, and all the things that we need, housing, education, and healthcare has gone through the roof, well, doing more of the same is not gonna get you out of that situation.
23:06 David Senra? So I think that more people are gonna have to learn to become founders and entrepreneurs, whether that's a one-person business, or a large business, and everything in between. I just think that's...
23:17 David Senra? That's the path forward, especially if there's limited economic growth like there has been in the United States in the last 20 years. Alright, so off my soapbox and back to the book. Jack Doesn't Sugarcoat The Challenges To His Employees. One of his favorite messages to them is, "Today is brutal, tomorrow is more brutal, but the day after tomorrow is beautiful. However, the majority of people will die tomorrow night." So I've heard him say that multiple times in different speeches too. So that's definitely Jack-ism. So this is a little bit more on his personality, and I found this interesting. It talks about when you visit Alibaba, their headquarters, what's in their library. So it says, "Jack is a keen reader, particularly of titles by the Hong Kong-born martial arts
24:01 David Senra? writer, known in China by his pen name Jin Yong. His works are featured in the library along with classical works and the latest books on management theory are Silicon Valley icons like Steve Jobs and Elon Musk." Both those books we've covered here, maybe I can get Jack Ma to listen to the podcast. "Employees are discouraged from ever complaining, a pet peeve of Jack's, and encouraged instead to shoulder personal responsibility, carrying out or delegating tasks rather than waiting for orders from on high." That's a message I can definitely support. And, okay, so now I'm skipping ahead.
24:44 David Senra? This is, I wouldn't say by far, it is one of the most interesting parts of the book. So I'm going to spend a good amount of time, a decent amount of time, talking about his early life, because I think this is very inspiring, that no one starts out as a multi-billionaire. And in Jack's case, you couldn't have started out, it'd be very hard to find somebody that started out lower. So this is a little bit about his early life, about his discipline, and about his curiosity. "A future icon of Chinese entrepreneurship, Jack came into the world at a time when private enterprise had almost been completely extinguished.
25:27 David Senra? Ninety percent of industrial production had been taken into the hands of the state. As a boy, Jack fell in love with the English language and literature, particularly reading Mark Twain's The Adventure of Tom Sawyer."
25:43 David Senra? Later, it was the arrival of foreign tourists in China that provided Jack with his opening to the outside world. In late 1978, when Jack was 14, China launched their new open-door policy. So, this is before I was born, but they had a leader. His name was, I don't know how to pronounce it, Deng Xiaoping, maybe? So, China was doing really poor at the time, so they're in pursuit of foreign trade and investment, and they're kind of loosening up state control over some things. And according to this book, the country was on the verge of bankruptcy, and it needed hard currency, so it's decided to open up its borders a little bit. So, in 1978, only 728 foreign tourists visited...
26:28 David Senra? Okay, this is the city he lives in. I'm gonna pronounce it Hangzhou. So, hopefully, that's kind of close. But the following year, more than 40,000 came to the city. So, within a year of opening this up, it would go from 700 people to 40,000. Jack, and this is gonna be one of the first... In the book, in his life story, there's just a bunch of lucky breaks, and we're gonna see how they kind of connect to them. Now, he's smart enough and disciplined enough to take advantage of them, but he was extremely fortunate in many of these cases. So, it said, "Jack relished an opportunity to practice his English. He started waking up before dawn and riding his bicycle for 40 minutes to the Hangzhou
27:11 David Senra? Hotel to greet foreign tourists." Remember, he's 14 at the time. "As he recalled, 'Every morning from 5 o'clock, I would read English in front of the hotel. A lot of foreign visitors came from the USA and from Europe. I'd give them a free tour of Westlake," that's the neighborhood, "and they taught me English for nine years. And I practiced my English every morning, no matter if it snowed or rained." Jack never dismisses how much learning the language had helped him in life. "English helps me a lot. It makes me understand the world better, helps me to meet the best CEOs and leaders in the world, and makes me understand the distance between China and the world."
27:54 David Senra? So the next page, the note I left myself is a random meeting changes the trajectory of Jack's life, and this is one of the lucky breaks. Among the many tourists who came to Hangzhou in 1980 was an Australian family, the Moore, known as the Mooreleys. For Jack, their visit would change his life. So he went to meeting this young boy, and his name is David, David Morley. And David's talking here, and it says, "It was on that free evening, flicking matches in the park, that I was approached by a young man wanting to try his newly acquired English skills on me. He introduced himself, we swapped pleasantries, and agreed to meet in the park again. On July 4th, their last day in Hangzhou, David introduced Jack to his sister Susan,
28:39 David Senra? and invited him and some other local children to play frisbee with them in the park. David's father," so now David's father's coming over to the park. "David's father, Ken Morley, once described his first impressions of Jack as a barrow boy or a street hawker." And he's not, he doesn't mean that as a pejorative by any means. You'll see how important David's father Ken is in Jack's life. "He really wanted to practice his English, and he was very friendly. Our kids were very impressed. David described how the family stayed in touch. What followed that meeting was a pen pal relationship that I kept up for a few years until my father started to take an interest in helping this young man.
29:19 David Senra? Jack would correspond regularly with Ken, referring to him as Dad, who asked him to double space his letters so that any corrections could be sent back in the spaces. David," remember David's a son. "David explained, the original with corrections was returned for learning purposes with the reply letter. I believe this greatly helped and encouraged Jack to continue with his English studies." So in between more stories on how the Mooreleys are gonna help Jack, I found an example of Jack's perseverance. So I wanna talk about that real quick. So it says, "These skills were of little use against one of Jack's earliest foes." They talk about how he really got into martial arts and Tai Chi when he was a young man.
30:02 David Senra? "In China, all high school students hoping to go on to higher education have to pass a merit-based national higher education entrance exam, commonly known as the..." Gekao, literally the high test. I'm just gonna call it the high test. The high test takes place over two or three days. Math, along with Chinese and a foreign language, is mandatory. The high test is widely seen as one of the most challenging in the world, requiring a huge amount of preparation and memorization. Today, there is growing criticism of the exam's negative social consequences, including depression and suicide. Jack took the high test but failed badly, scoring one out of one hundred and twenty in math. His hopes crushed, he took to menial labor delivering heavy bundles of magazines from
30:47 David Senra? printers to the Hangzhou train station on a pedicab, a job Jack managed to land thanks only to his father's connections. Jack was rejected from numerous other jobs, including as a waiter in a hotel. He was told he was not tall enough. Jack found inspiration in the book Life, written by the Chinese author Liu Yao. The book relates the story of Gao Jilin, a talented man living in a village. Gao struggles but ultimately fails to escape the, uh, but ultimately fails to escape the clutches of poverty. Jack resolved to have a different fate and took the high test again.
31:28 David Senra? This time, his math score improved slightly to nineteen out of one hundred and twenty, but his overall score dropped considerably. Jack, once again, set out applying for jobs to make ends meet. He sent out eleven job applications but all met with rejection. Jack likes to tell the story of how even KFC, Kentucky Fried Chicken, turned him away, the only one of twenty-four candidates they didn't hire. Undeterred, Jack became a, became a regular every Sunday at the library of his university, where he, of this university, where he committed to memory the formulas and equations he would have to master to pass the test. Jack never gained admission to a prestigious university in Beijing or Shanghai, but in
32:12 David Senra? nineteen eighty-four, when he was nineteen, he raised his math score sufficiently to win acceptance to a local university, the Hangzhou Teachers' College. On his third attempt at the high test, he scored eighty-nine in math. So it goes from scoring a one to nineteen now up to eighty-nine. His score was several points below the normal acceptance rate at other universities for a full four-year undergraduate degree. Normally, he would have been relegated to a two- or three-year associate's degree course, but Hangzhou Teachers College had a few spaces left for male students. And Jack squeaked in. The college was not a prestigious one.
32:53 David Senra? Jack recalled that it was considered the third or fourth class in his city. In his public appearances, Jack often speaks of his twice failing the high test as a badge of honor.
33:06 David Senra? Okay, so let's go back to this family from Australia. This is a story about when the Morleys invite him to come to Australia and then also about he kind of intuitively understands after this trip the importance of thinking from first principles. And so they meet Jack when he's a boy at fourteen. They're still in touch with him now. He's almost twenty. And so in nineteen eighty-five, Jack also received an invitation from Ken Morley to stay with his family at their home in Australia. It was the first time Jack had left China. He stayed for a month and returned a changed man. And now this direct quote from Jack. "Everything I'd learned in China was that China was the richest country in the world," Jack later said. "When I arrived in Australia, I realized it was totally different.
33:50 David Senra? I started to think you have to use your own mind to judge and to think." Jack's friendship with the Morleys blossomed. After Jack's trip to Australia, Ken Morley made a return visit to Hangzhou. As the Ma family home was too small to host guests, Jack arranged accommodations at a student college for the Morleys. Back in town, Jack arranged a banquet for his Australian friends with some local officials and VIPs. Looking out over a street below where a festival was taking place, Stephen recalls, "I'd never seen so many people congested in one place." It became clear that when Jack, it became clear then that Jack was a bit of a networker.
34:32 David Senra? Organizing a vehicle and a dinner with the mayor required connections. Back in Hangzhou, Jack's university life was not carefree. Money concerns were pressing. Once again, Ken Morley stepped in to help. While the tuition at the college was free, the compulsory live-in fees were beyond the means of Jack's family. "When we came back to Australia, we thought about it," Morley recalled, "and decided we could help. It was not much, five to $10 a week, I think. So I would send him a cheque every six months." So they're financially supporting Jack, allowing him to study, and their support doesn't stop there. Now, this is also amazing.
35:15 David Senra? So, Jack gets married to his wife Cathy, and the Morleys are actually gonna help him buy his first house, apartment. The Morleys once again showed their generosity and gave the couple $22,000 Australian dollars, at the time it was about $18,000 US, to help finance the purchase of their first home. Jack later said that words could not express what Ken and Judy Morley had done for him. Ken died in September 2004 at the age of 78. His obituary in a local newspaper records that he had taken his children to China and
35:55 David Senra? Cuba and encouraged them to get an education, travel, and have a political point of view. This broad-minded, generous approach extended outside the family, and Ken is well-known for befriending a young, a poor, young Chinese boy. This boy is now a man who heads a successful company in China. So I just thought that was amazing. Just an amazing act of generosity. And could you imagine giving $18,000? And I need to say this, Ken wasn't, he was just working class, he wasn't rich. You know, his family had some resources, but they were not considered rich, so it's quite extraordinary.
36:39 David Senra? Alright, so I'm gonna skip ahead to Jack's first business, and this quote, "To get rich is glorious." Jack was not yet an entrepreneur. Upon graduating in 1988 with a bachelor's degree in English, he had become a lecturer in English and international trade at the Hangzhou Institute of Electrical Engineering. Jack was the only one among 500 graduates to be assigned to teach in an institution of higher learning. But he had started to think of a future beyond teaching. Jack recalled the lesson he drew from Deng's Southern Toy Tour. Deng is the Chinese leader, the one who opened up China. And in 1992, he undertook something called his famous Southern tour.
37:22 David Senra? And it was on that tour when he pronounced that to get rich is glorious. So, okay, so Jack recalled the lesson he drew from Deng's Southern tour. You can be rich, you can help other people be rich. Jack began to pursue opportunities outside his school. He started teaching English classes at the Hangzhou YMCA. Jack's English classes were popular because he spent little time teaching grammar, vocabulary, or reading out texts. Instead, Jack preferred to pick a topic and engage in conversation. Okay, so he has a day job at the university. And then at night, he starts making some extra money on the side, teaching other people English. But Jack's teaching days were coming to an end.
38:06 David Senra? He resolved to launch his own business before he turned 30. Working part-time on his new business after class, he named his first company, Hope. In January 1994, at the age of 29, Jack founded the Hangzhou Heibo Translation Agency. So when I was reading this, it's interesting to me because there was somebody, I think Northwestern University just did a study. Because there's like this myth that permeates that if you don't start a company when you're young, that it's just not going to happen for you, when it's the opposite is true. So the results of the study was a person is 46 years old, is three times as likely to found a successful business as a person who's 25.
38:48 David Senra? And it talks about, it's the definitive new study that dispels the myth of the wonder kid. So when you're young, you certainly have an advantage in the sense that you probably have a lot less to lose and you can recover from mistakes faster. But people gain a lot of knowledge with experience, especially since I think of, when I think of entrepreneurship, I think of Peter Drucker's famous quote, that it's not an art, entrepreneurship is not an art or a science, it's a practice. And the reason I bring that up is because he's 29 years old, he's going to found this company Heibo Translation Agency, which he's calling Hope, right? And it's not going to work out. And he has to found, it's two more companies before he finally starts Alibaba.
39:30 David Senra? So I just wanted to share that with you. Okay. So Jack convinced some students from his English night school to lend a hand with the business, largely to help find his first clients. On opening day, his students went to this Wulin Square, which is nearby his office, with banners to help publicize the company. So we're going to learn a little bit about this business now, and I love this idea. It's about jumping into the sea. So, okay. So this is one of Jack's first employees talking. "Nobody else saw the opportunity in this business. We didn't make much money at first, but Jack persevered. I respect him tremendously, for he has a great ability to motivate people, and he can invest in things that seem hopeless with exciting possibility. He can make those around him get excited about life."
40:15 David Senra? So they call this "Jack Magic." It's the way he gets people hyped up and the way he has this infectious personality. So he's going to describe his business, and it's interesting because the timing is really good for him, because there's what they call an entrepreneurial revolution happening at this time in China. "Jack's first business was focused on helping local companies find customers overseas. Jack later recalled, 'I had to teach during the day and had no time to help others do translation work. But lots of retired teachers had nothing to do at home, and their pension was low. So I wanted to found a translation company, to be an intermediary. With its narrow focus on translation, Jack would not find commercial success with hope.
40:58 David Senra? But his first venture gave him direct exposure to the entrepreneurial revolution and his first tentative steps as an entrepreneur himself.'" The Chinese word for hope was "hibo," which literally translates to "vast like the sea." Popular slang for leaving a government job and entering the private sector at the time was to jump into the sea. Jack wanted to get his feet wet as an entrepreneur, but he wasn't quite ready to take the plunge and abandoned his public-sector job as a teacher. Entrepreneurship is such a well-established part of modern Chinese business and culture today, that it's easy to forget how much things have changed in the last few decades. In the earliest days of China's economic reforms, entrepreneurship was viewed as a
41:42 David Senra? highly risky, even illegal undertaking. Memories then were fresh of those imprisoned or even executed during the Cultural Revolution for carrying out commercial activities." The book gives some examples.
41:58 David Senra? So I just want, this is really interesting to me. So the first entrepreneurs, and it's a Chinese word, get who, maybe? The get who were not leaving behind a stable government job, but rather were those with nothing to lose. They were mostly agricultural laborers, their low status inviting the pejorative association of peddlers. As they grew richer, they were resented and mocked for their success and lack of class. One early get who even papered the walls of his home with banknotes. Some of the richest business people in China today started out as lowly get who. Many in the Zhenjing province, which is, I think, which is the province that, uh, that Jack was from.
42:41 David Senra? And these are examples of the same people in his province, uh, that were considered get who, that were, you know, relatively poor and then they go on to be rather successful. So here's some examples of that here. Today, many of the province's entrepreneurs sit atop China's rich list. Most, like Jack, started out living hard scrabble lives. Zhang Qinghu, worth more than $11 billion, is the founder of Wahaaha, China's largest beverage manufacturer. From the age of four, Zhang grew up in Hangzhou, later working on a salt farm, working on a salt farm on an island off the coast of Ningbo, before graduating from secondary school. In the 1980s, he sold ice pops on the street for less than a penny.
43:25 David Senra? Liu Shufu, worth more than $2 billion, founded Geely, China's first non-state-owned car manufacturer. He started out assembling refrigerators using spare parts, then in 1988 founded Geely. In 2010, Geely purchased Sweden's Volvo cars. Liu Gangqi, worth more than $7 billion, is the founder of Wang Ziyang Group, the Hangzhou-based auto parts manufacturer. He started out as a farmer, then started buying scrap metal from villagers. Then there's a guy named Gu Guangchang, a man worth an estimated 7 billion is the founder of an investment firm, Fosun.
44:05 David Senra? Gu survived the Cultural Revolution only by eating moldy dried vegetables, later winning entry to Shanghai's prestigious food and university where he sold bread door to door in the dorms to make ends meet. So that, I liked, I really liked that, those few paragraphs there. Just as a reminder that people, you know, people do a lot more with a lot less. And this is Jack on the advantage that these founders had. Jack summed up the dynamism of his home province. As entrepreneurs from Shenzhen, our greatest advantages are that we are hardworking, courageous, and good at seizing opportunities. We have these excellent qualities because we were given nothing.
44:49 David Senra? We are not like other provinces which had resources of coal or ore. We entrepreneurs have markets. As long as we're in places where there are people, we will always be able to find opportunities. It will be in the same, it will be the same in the future. I really liked that, that thought into, well, this part reminded me, the note I left myself was the obstacles, the way, and this is his first exposure to the internet. In 1994, his Hope Translation Venture had gotten off to a troubled start. While his monthly office rent was almost $300, his first month's income was just over $20. Hope may spring eternal, but cash is king. Jack was facing a crunch. To support his venture, Jack started peddling goods on the streets.
45:32 David Senra? His translation company also became a trading company. Hope started to sell gifts, flowers, books, and even plastic carpet, a range of items that foreshadows Tabao. Jack recalled, "We did everything. This income supported the translation agency for three years until we started to make ends meet. We believed that as long as we kept doing it, we would definitely have a future." Soon, an unexpected journey, which looked first like a disaster, was about to give Jack a lucky break. This is what I mean by the obstacles away. So he was hired to assist as an interpreter in helping resolve a dispute with an American company over the construction of a new highway.
46:15 David Senra? So the fact that he's, remember back when he was 14? He starts, he spends every day, I think for eight or nine years,
46:23 David Senra? practicing his English. So because he spoke English so well, the government lists him to try to resolve this dispute with an American company. So they're gonna send him to America, and this is where he's gonna see the internet. After a year of negotiations, no agreement had been reached, and the initial funding promised by the partner in the United States had not materialized. Jack was tapped to find out what was going on and hopefully end the deadlock. First, Jack traveled to Hong Kong, where he was told that the company's funds were held in the United States. So Jack embarked on his first trip there. He would stay for a month. The trip would give him his first exposure to the internet, and he would return to China, a changed man.
47:06 David Senra? So he's up in Seattle at the time, and this is the first time that he sees the internet, and this is the genesis of his second business. And it's, he says, "Jack recalled his first online session. My friend Stuart said, 'Jack, this is the internet. You can find whatever you can find through the internet.' I said, 'Really?' So I searched the word beer, a very simple word. I don't know why I searched for beer, but I found American beer, German beer, and no Chinese beer. I was curious, so I searched China, and no China, no data. Intrigued, Jack asked Stuart for help. I talked to my friend. 'Why don't I make something about China?' So we made a small, very ugly-looking page for the translation agency, and I listed
47:51 David Senra? it on there. The site for Hope Translation was just text, without any images, plus a telephone number and the price for translation work. Jack later recalled to the journalist Charlie Rose. "It was so shocking. We launched it, we launched it 9:40 in the morning. 12:30, I got a phone call from my friend. 'Jack, you've got five emails.' I said, 'What is email?' Three emails came from the United States, one from Japan, and one from Germany."
48:22 David Senra? Back in Hangzhou, this is, he returns now, he set about building his concept of an online Yellow Pages. He named the business China Pages. In this, his second venture, he would dive headfirst into the entrepreneurial sea, leaving his teaching days behind. So, this company is going to be called China Pages, and it says, "The company was one of the first in China devoted to the Internet." To fund his startup, Jack borrowed money from his relatives, including his sister, brother-in-law, and parents. Jack's wife Kathy was the first employee. On May 10, 1995, they registered the domain name ChinaPages.com in the United States. In July, they officially launched their website, which featured a red framed map of Asia,
49:05 David Senra? with China highlighted under the title, "China Business Pages: The Online China Business Directory." And this is what China Pages looked like when somebody came to visit. "I can still remember the first scene I saw when I walked into his office. It was a pretty empty space with only one desk set up in the middle of the room. There was only one very old PC desktop, surrounded by a lot of people." So, the idea for the company is, it's just going to be a directory, a listing of all the businesses in China, and try to help those businesses find more customers. So, this is really interesting. The note I left myself was, "The Internet on Paper." China Pages needed more clients if it was going to survive. But demonstrating what China Pages was all about was not, was not easy, for one very basic reason.
49:50 David Senra? In Hangzhou at the time, it was impossible to get online. Instead, Jack came up with an alternative approach. First, he spread the word through his friends and contacts about what the Internet could do for their business. He then asked those interested to send him marketing materials to introduce their companies and products. Next, Jack and his colleagues translated the materials and sent the materials by mail to VBN in Seattle. VBN is his partner, they're the ones running the website out of, in the United States in Seattle. VBN then designed, then designed the websites and put them online. Then they printed out screenshots of the websites and mailed them to Hangzhou.
50:31 David Senra? Finally, Jack took the printed materials to his friends and announced that, although they couldn't check this themselves, their websites were now online.
50:42 David Senra? By the end of the year, there were only 204 Internet users in the whole province. But Jack was among them and he was finally able to load a website in front of his first clients. Now, check this out. "On the 486 computer he brought back from Seattle in his suitcase. It took three and a half hours to download the front page. I was so excited." Skipping ahead in a few pages and a little bit on the timeline, this is an example of more perseverance. So, he's running China Pages. He's got some clients, but, well, we're gonna just see right here. "While Jack was good at gaining publicity, China Pages still wasn't winning much business, and its efforts to open doors with the central government came to naught.
51:24 David Senra? In July 1996, China's national broadcaster broadcast a documentary called Ma Yang, the Scholar," that's Jack's name, "which showed Jack being rebuffed by a government official." As she filmed, Jack was getting shown the cold shoulder. He was almost bankrupt. "In the documentary, through a window to the Beijing streets outside, Jack made a resolution to himself. 'In a few years, you won't treat me like this. In a few years, you will all know what I do, and I won't be in dire straits in Beijing.'" So, he winds up getting a little bit of business. Skipping a little bit ahead, this is where he loses control.
52:07 David Senra? They're almost running out of money, so he's forced to merge with a state-owned enterprise. It's one of these telecoms that were interested in getting in the Internet, and he thought it was gonna be some kind of like joint venture partnership, and they wind up screwing him over. And what happened is, there's like seven people in the board seat, and because this quote-unquote joint venture, the state-owned enterprise awards itself five out of the seven board seats. So, they would basically have an idea, and then at the board seat, just, excuse me, the board meeting, every single idea, none of his ideas were passed. So, they just wanted to basically squeeze him out. And this is some of the lessons that he learned.
52:52 David Senra? Jack had lost control of his pioneering venture. At that time, I called myself a blind man riding on the back of blind tigers. Without knowing anything about technology or computers, I started the first company. And after years of terrible experience, we failed. The China Pages episode provided him with some important lessons, as well as good materials for his speeches, such as, "It is difficult for an elephant to trample an ant to death, as long as you can dodge well. And with good strategies, you will definitely survive." To this day, I realize one thing: Don't be nervous if you face huge competition in the future. Jack points to China Pages as influencing the way he would structure his subsequent ventures.
53:36 David Senra? "From then on, I have held a firm belief: When I start a business in the future, I will never hold the controlling stake of the company, making those controlled by me suffer. I will give plenty of understanding and support to lower levels." He felt he was suffering. He was the one that was being forced to suffer. "I have never once had a controlling stake at Alibaba. I am proud of this. I am the CEO of the company, because I lead it with my wisdom, courage, and resourcefulness, not capital." Jack's invented quote that the internet would change everything was right. The problem was that he had launched his venture too soon. Jack put his dreams on hold, taking a job in Beijing at the unit of the Ministry of Foreign Trade and Economic Cooperation.
54:20 David Senra? So he goes back, working for the government. There he was, like a fish out of water, counting the days until he could jump back into the entrepreneurial sea of China's internet, which is about to get a whole lot bigger. After his struggles with Hope Translation and China Pages, and an uncomfortable period working for the government in Beijing, Jack went on to found Alibaba at the beginning of 1999.
54:47 David Senra? Okay, so now he's on his third shot. So let me just give some background. I'm going to skip over a bunch of stories in the book. I want to get to where he meets Jerry Yang, and definitely another lucky break. So, he's working for the government in Beijing, and at the time Yahoo is extremely popular in the United States, so a lot of people copied that idea, and there's a lot more successful internet companies in China at the time, including three of the largest ones, which are portal companies, similar to what Yahoo was back then. And, at the time, Jerry Yang is like a hero in China for founding Yahoo and becoming so successful when he was so young.
55:30 David Senra? So Jerry Yang is traveling to China to look for opportunities. And Jack winds up getting assigned to be his tour guide. Okay? So, "Jack became increasingly frustrated as he watched the triumvirate of portal pioneers gain momentum. 'Here I was. I had been practicing for five years in the internet field,' Jack recalled. 'Everything changing very quickly. If I stayed in Beijing, I couldn't do something really big. I couldn't realize my dreams as a public servant.'" But his government perch ended up giving Jack another lucky break: his first encounter with Jerry Yang, the co-founder of Yahoo. As the general manager of InfoShare and a fluent English speaker, Jack was asked to
56:14 David Senra? receive Jerry Yang and his colleagues, who in late 1997 came to Beijing to look for opportunities for Yahoo in China. Jack's experience as a self-appointed tour guide in Hangzhou came in handy now in Beijing since Jerry was traveling with his younger brother Ken and was keen to see some of the sights. So this lucky meeting with Jerry Yang becomes very important. Later on, as you might know, Yahoo invest a billion dollars into Alibaba. And it's due in part to the relationship that Jack starts to cultivate with Jerry Yang and a bunch of other lucky breaks, which we'll get to. Now, I'm just going to hit some of his ideas on business that he talks about throughout the book.
56:59 David Senra? And this is making money from shrimp. He's already founded Alibaba at the time. So Jack convened a meeting on February 21st, 1999, at his apartment. Confident in his future success, he arranged for the meeting to be filmed. And this is him. "In the next five to 10 years, what will Alibaba become?" Answering his own question, he said, "That our competitors are not in China, but in Silicon Valley. We should position Alibaba as an international website." The reality was that Jack, late to the portal game, had to find his own niche in China. The portals were trying to capture the growing number of individuals, user, individual users coming online. But Jack was going to stick with what he knew best: small businesses.
57:43 David Senra? In contrast to the business-to-business sites in the United States that were focused on large companies, Jack decided to focus on the shrimp. He found inspiration from his favorite movie, Forrest Gump, in which Gump makes a fortune from fishing shrimp after a storm. "American B2B businesses are whales, but 85% of the fish in the sea are shrimp-sized. I don't know anyone who makes money from whales, but I've seen many making money from shrimp." And then he wants to assemble what he calls a team of regular people. Skipping ahead again, Alibaba was co-founded by a total of 18 people, six of whom were women. None came from privileged backgrounds.
58:25 David Senra? Prestigious universities are famous companies. This was a team of "regular people", bound together by Jack's energy and his unconventional management methods.
58:40 David Senra? So Alibaba's off and running. I just want to include this because this was surprising to me and it's Jack's biggest rival and it's not what you would think. And there's all these kind of stories in these books that I've been reading for the podcast that it's always like a slap in the face and a reminder to me that the global market is massive and there's millions, if not more, businesses you've never heard of that print money. And this is a business I wasn't, I'd never heard of. And it's, well, I'm going to tell you a little bit about it now. So this is Jack's biggest rival. Instead, Jack's biggest rival was not even a new economy company at all. It was an old-school publisher of trade magazines. Global Sources, that's the name of the company, had been around for more than three decades.
59:25 David Senra? The company was run by its founder, Merle Henrichs, a reclusive American whose base of operation was his 160-foot yacht anchored in the Philippines. Henrichs was a native of Hastings, Nebraska, but he had been a resident of Asia since 1965. He had built up his company, originally known as Asian Sources Media Group, by churning out thick trade catalogs stuffed with advertisements for manufacturers in Asia, of electronics, computer products, watches, toys, and sporting goods. Sent to buyers such as Walmart, the magazine generated hundreds of millions of dollars of orders per year.
1:00:07 David Senra? Reluctant to cannibalize its profitable offline business, Global Sources was nervous about building a presence on the web. Henrichs was dismissive of B2B sites, and he said, "Suppliers and buyers were happy with the fax machine, as that was cheap and simple to use." So, at this time in the book, he's looking for investment. Alibaba's already up and running. And at the time Goldman Sachs starts an investment division, looking specifically to invest in businesses in Asia. So this is the worst deal he ever made. Jack had succeeded in securing a big-name investor in what would prove a critical step in Alibaba's story, but he would also come to regret selling such a large stake in the
1:00:50 David Senra? company, 50%, which he would never recoup. In reality, though, Jack had little choice. He was an unproven entrepreneur based in a provincial city in China who was negotiating with a huge global financial institution. But having already given out a lot of equity to his co-founders, and now 50% to investors, he ended up with a much lower share of his company than many of his peers. Jack would later joke, only half-kidding, that it was "the worst deal I ever made."
1:01:21 David Senra? And Goldman Sachs actually winds up losing faith. They sell, they prematurely sell their stake in Alibaba. They wind up making money. I think, I think I cover it later in the podcast, but just in case I don't. Within like a few years, I think they get like 7X their number. But if they would have held on, that 5 million would have been a few billion dollars. So this part I highlighted is, the note I left is, wisdom is distilled experience. Jack reveled in the attention he received at Harvard, including the moniker Crazy Jack that Time Magazine gave him shortly after. He particularly enjoyed talking about the reversal of fortune of being once rejected by Harvard, but later being invited there to give a talk. I did not get an education from Harvard.
1:02:05 David Senra? I went to Harvard to educate them. Jack has always been dismissive of business schools. It is not necessary to study an MBA. Most MBA graduates are not useful. Unless they come back from their MBA studies and forget what they've learned at school, then they will be useful. Because schools teach knowledge, while starting businesses teach wisdom. Wisdom is acquired through experience. Knowledge can be acquired through hard work. So that quote, I mean, obviously, I think it's, you know, it's, he's got a flair for the dramatic, so I don't think he means every, I mean, he says, "Most MBA graduates are not useful." That's probably not true. But I do think it's interesting, his idea where he's like, "Okay, well, schools are
1:02:48 David Senra? teaching you knowledge, but you need wisdom, and wisdom is acquired through experience." So you'd actually learn more from, from trying business first. And it says, "Knowledge can be acquired through hard work." I saw this tweet that I think is, is interesting, as far as a fast way to learn, which I think is what we're trying to do here. By reading books about people that have already successfully founded companies, you're kind of, you're receiving their wisdom, the wisdom that they've acquired through experience, which is basically distilled in book form. So this is a quote that I came across that I want to share with you. It says, "Reading is not a chore. Reading is theft. It is a robbery.
1:03:31 David Senra? Someone smarter than you has spent 20 years beating their head against the wall trying to solve the problem you're dealing with. You can steal that hard-won knowledge and make it yours. That is power." That's part of the reason I love reading, because like I always said, it's like having a one-sided conversation about somebody that's thought a lot about the topic they're writing about. Because to write a book, in the case of Jack Ma, we're distilling, you know, 25 years of building businesses. And you're not going to learn everything in that time, but it's one hell of a shortcut. And as far as the amount of time, like signal to noise ratio, or time to value ratio, I think is extremely high. Okay, so I'm going to spend some time on, so there's this company called SoftBank,
1:04:15 David Senra? which is really well-known. I think they run the largest fund in the world. And they wind up investing in Alibaba. And according to some extra research I was doing to get ready for this podcast, its most successful investment ever was the one, the investment they make in Alibaba. So they give Alibaba $20 million, and the investment turned, that 20 million turns into 60 billion when Alibaba went public. So that's from SoftBank's Wikipedia page. I did not, I couldn't find if they held on all the way through, but that's an insane amount of return. So SoftBank's going to invest, and I've heard the name of their founder, and his name's Masayoshi Son.
1:04:58 David Senra? And this is, I've even looked for a biography on this guy, because he just seemed interesting. And I couldn't find anything. So this book actually dedicates a few pages to, almost like a mini biography. So I'm going to read a lot of this part, because I find it fascinating. Well, let me just get into it. Masayoshi Son, known to his friends as Masa, shares some similarities with Jack. Both are short in stature and known for their outsized ambitions. Son grew up in circumstances even more difficult than Jack's. Born on Japan's southernmost main island of Kishu, Kyu- Kyushu? The Sons lived in a shack and didn't even have an official address.
1:05:40 David Senra? His father was a pig farmer who brewed moonshine on the side. Son was bullied for being ethnically Korean and was forced to adopt the Japanese surname Yasumoto. At the age of 16, Son moved to Northern California in search of a brighter future, gaining acceptance at the University of California, Berkeley, where he started his entrepreneurial career. His most successful venture was building a voice-operated translation device to be sold at airport kiosks. Son designed, built, and then licensed the technology to Sharp Electronics for half a million dollars. In the United States, Son started to import early models of the Pac-Man and Space Invaders game consoles
1:06:21 David Senra? that were becoming popular at the time, leasing them to local bars and restaurants. After moving back to Japan in the early 1980s, Son started a software distribution company. At the launch of the venture in a scene echoing Jack's own irresponsible optimism, or irrepressible optimism, sorry, he famously climbed on top of a shipping box in front of his employees, just two at the time, both working part-time, and vowed that their new venture would make 50 billion yen, 3 billion dollars, in revenues within 10 years. By the time he first met Jack, Son had become a billionaire many times over. He was known for making quick decisions.
1:07:02 David Senra? One of his best was the prescient investment he made in Yahoo in 1995. Son also negotiated the right for SoftBank to become Yahoo's exclusive partner in Japan, a deal that would yield him tens of billions more. Meeting Sun, Jack knew he had found a kindred spirit. We didn't talk about revenues. We didn't even talk about a business model. We just talked about a shared vision.
1:07:28 David Senra? Both of us make quick decisions, Jack recalled. When I went to see Masayoshi Son, I didn't even wear a suit that day. After five or six minutes, he began to like me, and I began to like him. People around him have said that we are soulmates. At their first meeting, after Jack had finished describing Alibaba, by now some 100,000 members strong, Sun immediately turned the conversation to how much SoftBank could invest. "I listened to Mr. Ma's speech for five minutes and decided on that spot that I was ready to invest in Alibaba," Sun recalled. Sun interrupted Jack's presentation to tell him he should take SoftBank's money because he should spend more, he should spend money more quickly.
1:08:10 David Senra? Sun was asked what it was, what it was that prompted him to bet, to bet on Jack back in 2000. It was the look in his eyes. It was an animal smell. It was the same when we invested in Yahoo, when they were still only five to six people. I invest, I invested based on my sense of smell. I, I don't even know what to, I don't even know what to make of that. A few weeks after their first meeting in Beijing, Sun invited Jack to Tokyo to finalize terms. As soon as they entered Sun's office, the negotiations began. Jack would later infuse his description of their meeting with martial art imagery, and this is a direct quote from Jack right now.
1:08:50 David Senra? "Masters of negotiation always listen, don't talk. Those who talk a lot only have second-rate negotiation skills. A true master listens, and as soon as he moves his sword, you pretty much collapse." Goldman and the other funds had just invested $5 million for half of the company, valuing Alibaba at $10 million. Masayoshi opened negotiations by offering 20 million for 40% of the company. This valued Alibaba at $50 million post-money. In just weeks, Goldman, Goldman's investment had increased in value by three times. But then we thought, we didn't want to give up too much equity, so Jack said, "Masayoshi, that doesn't work for us."
1:09:32 David Senra? Masayoshi had a calculator. He was literally doing the math right there. But Masayoshi wanted 40%, so he said, "How about double the money? I put in 40 million for 40%." Jack offered to think it over. Upon the return to China, Jack wrote Sun an email turning down the $40 million investment. Instead, he offered to take $20 million for 30%, adding, "If you agree, we will go ahead. If not, that's it." Jack later explained why he turned down the larger amount. "Why would I need to take so much money? I didn't know how to use it, and there would definitely be problems." Jack didn't have to wait long for his reply from Sun, which came in the form of two words: "Go ahead."
1:10:15 David Senra? So, this is his idea of being the last man standing. Alibaba at the time is going through a lot of trouble. They're running out of... They're burning through money. They're not making enough money. They're just having all kinds of problems with their websites. So it says, "The dark days of 2001 and 2002 would later become part of Alibaba's lore." Jack later referred to this period in one of his pep talks to the team. "At that time, my slogan was, 'Be the last man standing. Be the last person to fall down. Even on my knees, I had to be the last man collapsing. I also believed firmly at that time that if I had difficulties, that there must be someone who had worse difficulties. If I had a hard time, my opponents had an even harder time.
1:10:57 David Senra? Those who can stand and manage will win eventually." At this time, Taba... Tabaos is up and running. It's doing well, but it's having to fight the Chinese market against eBay. And the note I left myself was, "The shrimp tactic." So it said, "eBay signed exclusive advertising contracts to promote its site on all the major China internet portals, preventing them from displaying ads promoting rival sites. This forced Alibaba to attempt to adopt a series of guerrilla marketing techniques, including reaching out to hundreds of small but fast-growing sites and online communities that eBay had deemed unimportant." With the backing of SoftBank, Jack took a move from Yahoo Japan's playbook. Remember, SoftBank owns Yahoo Japan.
1:11:39 David Senra? "In 1999, when Yahoo Japan launched its e-commerce business, the CEO asked his 120 employees to list items for sale on its new site to make it look active and popular. Four years later, in China, Jack did the same. We had altogether seven, eight people in the Tabaos team. Everyone had to find four items. I rummaged through my chest and cupboards. I barely had anything at home. We pulled about 30 items, and I brought yours, and you brought mine. And that's how it started. I even listed my watch online."
1:12:10 David Senra? So this fight that they, the fight they actually have with eBay, it's actually a case study in managing, in what, and how to manage, and what, and how not to manage, rather, a business in a distant market, or learning what not to do. More money. eBay itself remained oblivious to the rising threat, considering itself far superior to this quirky local rival. When asked about rivals in China, eBay's senior vice president mentioned only one, and just mentioned some, one that doesn't even exist anymore, so we don't need to worry about the name. Jack reveled in being ignored. During the first year, eBay didn't consider us their rival. They didn't even think we could be, they didn't even think that we could be their rival.
1:12:54 David Senra? They thought, "We haven't even heard about Alibaba, such a strange name. Chinese all know what Tabao means, foreigners don't." eBay was confident that its global network and experience would ensure each net pulled well clear of any competitors. Each net was the eBay clone that eBay buys to get into the, into the Chinese market to begin with. But corporate bureaucracy worsened by the extended and dysfunctional reporting lines, all the way to San Jose, were to smother whatever embers of entrepreneurialism still burned within each net in Shanghai. eBay's China adventure lasting from 2003 to 2006 is today a case study in how not to go about managing a business in a distant, and now I'm just going to highlight and compare
1:13:39 David Senra? and contrast how Tabao wins with the local strategies and how eBay basically does, well, does basically everything wrong that you could possibly think of. So this gap was reflected in the design of the two rivals' websites. eBay's, eBay moved quickly to align the each net site with its global site, revamping how products were categorized and altering the design and functionality of the website. This not only confused customers, but also alienated a number of important merchants who saw their previously valuable China account names had been deleted. This invalidated their trading history and forced them to scramble to reapply for new names on an unfamiliar global platform. Worse still, the Chinese website lacked a customer service telephone number.
1:14:21 David Senra? eBay's China site, modeled closely on eBay in the States, looked foreign to local users, who found it empty when compared to local sites. In website design, culture matters. In the West, websites like Google had become popular for their clean lines and uncluttered negative space. But to the mass market of Chinese web users, accustomed to pop-ups and floating banner ads, they seemed static and dull. As you can see for yourself by opening tabeo.com, successful Chinese websites are typically packed with information and multimedia graphics, requiring many scroll downs to see the whole page. From its outset, Tabeo had been a website built by Chinese for Chinese, and it worked.
1:15:05 David Senra? It's not just the graphics that helped Tabeo connect with consumers. Tabeo structured its website like a local bazaar, even featuring innovative ideas such as allowing male or female shoppers to click a button to display products most suited to their interests. The design of the site makes it the virtual descendant of the Yiwu wholesale market, where Jack and many other entrepreneurs drew their inspiration. The founder of another niche e-commerce venture explained, "If you go to Yiwu, you can order as little as three pairs of shoes. One factory specializes in soles, another in the uppers, another factory or perhaps a small village specializes in the laces." Tabeo tapped the motivation of those small merchants to make money. For companies like eBay and Amazon, their experience in the United States and other
1:15:50 David Senra? Western markets proved to be of little use. "E-commerce in China is very strange," the rival e-commerce founder continued. "It started with consumer to consumer and with non-standardized products. This was unlike Amazon, unlike the conventional wisdom where you need to start with standardized products like books. The more standardized the supply chain, the higher barriers for e-tailers. All the smaller mom-and-pop stores selling non-standardized products are more accommodating, more flexible in supplying goods. That's unique to China." This is the crazy part. "By starting with consumer to consumer, it made the price factor very appealing.
1:16:33 David Senra? Individuals can be happy to make even less than one cent on a sale in China." Tabeo outsmarted eBay by having a better understanding of the country's merchants, for whom membership had been free of charge from the outset. Just as free listings was a core principle for the B2B Alibaba.com, it became a key competitive weapon for Tabeo.com too. Buyers pay nothing to register or transact. Sellers pay nothing to register, list their products, or sell online. Like we talked about earlier, it winds up being a completely free site for a long time, and then they wind up making a lot of money on it just by selling the sellers advertising. Each net had started out with free listings, but faced with spiraling costs in August 2001,
1:17:15 David Senra? it started to charge listing fees to sellers, adding commissions on all transactions the following year. These resulted in a sharp reduction in the number of auctions on the site. And then a few pages later, we find another decision, or a decision by eBay to centralize each net's website, winds up being disastrous. It says, "A decision by eBay in September 2004 would serve to push many of each net's customers away. eBay executives in San Jose decided to migrate the China website to the United States. Instead of hosting the website close to customers in China, it was shifted to the States. In a borderless internet where a website is hosted, it shouldn't matter. But China is not a borderless internet.
1:17:58 David Senra? In China, the effects of the government's longstanding efforts to build and extend the Great Firewall of China often means websites hosted overseas are much slower to load than those hosted in China itself. All web traffic accessing sites hosted outside the mainland had to go through a series of choke points where the request is screened." This, as you can imagine, slows down the site and makes it almost unusable. eBay had its reasons for the migration. As the business grew in China, the engineers in San Jose worried whether the platform built by Shanghai-based startup could cope. It turned out that each net had built robust technology capable of scaling up by even 100 times.
1:18:40 David Senra? But after a series of site outages that had damaged its reputation at home, eBay had become obsessed with the stability of its platform. eBay pushed ahead with the China migration anyway. The attraction of a unified worldwide site with a consistent set of features was just too hard to resist. Some senior executives within eBay already knew that migration would be a mistake. The company had already seen the damages, the damaging impact in Taiwan. But bizarrely eBay managers in Taipei were blocked by migration obsessed managers in San Jose from sharing their experiences with the team in Shanghai. As predicted, as soon as the China site was migrated and integrated into the global
1:19:22 David Senra? site, the impact of each net's traffic was disastrous. It dropped off precipitously. Customers in China started to experience long delays and timeouts on the site. And here's the best summary of it. "Why would they bother to wait for eBay in China, a site that charges fees, when Taobao was available instantly and for free?" So eBay, as they continued to experience trouble, they actually doubled down. And Meg Whitman makes a few curious decisions here. And this is going to introduce us to a series of Jackisms.
1:19:59 David Senra? And this is Jack responding when Meg Whitman announces that she's going to spend $100 million upgrading the site, hiring personnel, and spending money on advertising. And he says, "This was music to Jack's ears. He joked to Forbes Magazine that eBay had deep pockets, but we will cut a hole in their pocket. When I heard that eBay would spend $100 million to break into this market, I didn't think they had any technical skills. If you use money to solve problems, why on earth would you need businessmen anymore? Businessmen understand how to use the smallest resources to expand. Some say that the power of capital is enormous.
1:20:42 David Senra? Capital does have its power, but the real power is in the power of people controlling the capital. People's power is enormous. Businessmen's power is inexhaustible." That's the end of his quote. I think that really hits on probably Jack's most valuable trait is he really does know people. And what he's saying is the real power is the power of the people controlling the capital, not just the capital itself. So Jack continues to talk about this and he's going to throw out some Jackisms here too. "The moment she," meaning Meg Whitman, "wanted to use money as her strategy, we knew she would lose. First, they didn't consider us a rival. Then they treated us too seriously as a rival. Neither of them was the right strategy. When we say, 'If you have no enemy in your heart, you will be invincible to the world,'
1:21:28 David Senra? we mean you have different strategies and tactics. In terms of strategies, you must pay attention. Whenever there is a rival emerging, you have to study whether it could become your rival and if so, what to do. Whatever is stronger than you, you have to learn not to hate it. When you treat it too seriously as a rival and intend to kill it, your techniques are completely exposed. Hatred only makes you a short-sighted person."
1:21:57 David Senra? Okay, so the book details more of the fight and then the eventual win over eBay. So if you're interested, definitely you can read the whole story in the book. I'm going to skip ahead to Yahoo's billion-dollar bet. And it goes really into, there's an entire chapter on Yahoo in China. And I'm going to skip over a lot of it because if I read it all, this podcast would be like five hours long. So just this is the summary. "Yahoo had struck out twice in China. First founder, then 3721. After years of frustration, Jerry Yang made a bold decision. He handed Jack a billion dollars and the key to Yahoo China's business in exchange for a 40% stake in Alibaba."
1:22:41 David Senra? That means that was one of the best investments ever made also. So just to give you a little bit of background, what they're talking about there is the entire book is a series of American companies trying to come over to China and let's say from the year 2010 and just being beaten back mercilessly. I think there's a quote in the book where Jerry's like, "I don't think there's one American company that succeeded there." They spent a lot of money, but almost all of them failed. So Jerry's saying, "Hey, this is not working out. I'm going to bet all my money on this Jack guy." And Jack was not his first...
1:23:18 David Senra? Choice. I think it was like his fourth or fifth choice. So, and those all didn't work out for one reason or another. And this is another lucky break for Jack. He gets a billion dollars. And there's some overlap here. SoftBank at the time is Yahoo's largest shareholder. And is also the largest shareholder of Alibaba at the time. So they were essential in brokering this deal. So let's, well, let's start at the end here. A decade later, Jerry Yang reflected on the deal, pointing out that in 2005, when Yahoo made the investment, the balance sheet of Yahoo was around $3 billion. So it wasn't as though there was a huge amounts of cash at Yahoo.
1:24:01 David Senra? Putting a billion dollars into Alibaba, he added, probably raised a lot of eyebrows. And he says, he talks about like Jack's charisma being an important role and people not understanding it if you hadn't met Jack. So there's more of that Jack magic. But then he also, he says, he goes, "And he," meaning Jack, "really had an inside track on being a very dominant commerce platform in China." And here's the breakdown of the deal. And you'll see that Jack, in hindsight, kind of regrets it a little bit. Said, "The final ownership of Alibaba would be Yahoo 40%, SoftBank 30%, and existing management 30%. In 1999, Jack had sold 50% stake in Alibaba to Goldman Sachs and other investors, something he had joked was the worst deal he ever made.
1:24:46 David Senra? Did he feel any seller's remorse about parting with this 40% stake? A decade later, he again looked back on this deal. I asked for $1 billion and they gave us $1 billion. I thought the war between Taobao and eBay would be, would last for a long time. So we needed enough cash to fight. In the end, $1 billion was enough to scare off eBay. We asked a lot, but we did not know when we got the money eBay would run away." Which is exactly what happened. "So the money wasn't used." Jack said he would do the Yahoo deal again, but in a better, smarter way, adding, "Nobody knows the future. You can only create the future." So skipping ahead a little bit, this is another, I think, example of what I was just talking about,
1:25:31 David Senra? probably Jack's best skill.
1:25:34 David Senra? The Alibaba, the main Alibaba website, not T-Bow and T-mail, is going to have an IPO in 2005 in Hong Kong and then they have a IPO, a second IPO in 2014 in the United States. But this is one of the reasons
1:25:52 David Senra? Jack wanted to get this done. It said, "The second was that the IPO allowed Alibaba to take care of its employees. Jack understands people more than any business. He knows business well, but if you ask me the three skills Jack has amongst people, business, or IT, IT is the worst, business second, first is people." Alibaba's B2B business was eight years old. Jack knew that he needed to give his employees an opportunity to cash in their shares. David remembers Jack telling his employees, "You need to buy a house. You need to buy a car. You can't wait to sell the stock to get married, to have a baby. Selling the stock doesn't mean you don't like the business. I encourage you to sell some, to build your life, to give a reward to your family,
1:26:37 David Senra? because you've been working hard. You've been away from your family. They need some reward." And indeed, a few pages later,
1:26:47 David Senra? to build on this idea that he knows people, this is his unique reaction to the financial crisis. This is happening in 2008. As you can imagine, if Alibaba is connecting Chinese companies to companies all over the world,
1:27:02 David Senra? when you have an entire financial downturn like you saw in 2008, especially in the United States, his business is going to take a hit. So, "As the CEO of Alibaba.com, David Wei was expecting the falling share price would trigger a lot of pressure from Jack. But he remembers, "Jack never picked up the phone or came to see me about the share price, never once. He never talked about profit growth. But there was one occasion when he did experience Jack's wrath. The only time he called me after midnight was when our team changed the website a little bit." He was shouting. The only time he ever shouted at me. I had never heard him so angry. Are you crazy? Jack wasn't yelling at him about the stock price. He was angry about downgrading in prominence, a longstanding discussion forum,
1:27:47 David Senra? set up for traders to chat with one another. Jack demanded David move it back the next day. David pushed back, saying that Alibaba needed to focus on transactions, not discussions. Adding that the space on the homepage was very valuable for advertisers. So I think what David's saying there is very like a common thing, a typical business person
1:28:08 David Senra? would arrive to as a conclusion, and it's probably the exact wrong thing to do. And a person understanding people would make the move that Jack's gonna do here. But Jack was emphatic. This is a quote from him. "We are a B2B marketplace. Nobody comes to trade every day. We are more important a community than our marketplace. The same for Tabao. Nobody comes to shop every day. If you downgrade this forum, you are focusing too much on profits. Switch it back to a non-revenue generating entry point to the business community."
1:28:41 David Senra? And he continues, this is another thing that he does in reaction to the financial crisis that, again, most business people would object to, and indeed, most business people did, but it winds up being the right decision.
1:28:53 David Senra? Jack realized that the downturn gave him a way to increase the loyalty of his paying customers. He initiated a dramatic reduction in the cost of their subscriptions, telling David, "Let's be responsible to our customers. They are paying 50,000 yuan. We can give them 30,000 yuan back." "The stock market went crazy," David recalled, as investors called him up to complain. "What? You're losing 60% of your revenue." But there was a method to Jack's madness. Jack was serious about putting the customer first. But David emphasized Jack was not espousing an ideology or "let's give everything for free." Instead, Jack was always trying to understand how to get the money back later.
1:29:36 David Senra? He's just not greedy about getting the money first. Looking back on the price cut, David concluded that the move was well timed. Revenues didn't drop at all. Customer volume growth offset the price drop completely. And after the financial crisis was over, we didn't raise the prices. We created an opportunity to sell them more value-added services, more of an internet-style model. Jack actually told me he wanted to change it anyways. The crisis gave him the opportunity. Skipping ahead, I haven't talked about this much, but it's the theme throughout the entire book about the difficulty of operating a business in China and how you have this much stronger central government than you would see in like the United States or the West.
1:30:21 David Senra? So this is Microsoft and the Chinese government, and then Jerry Yang is fired.
1:30:26 David Senra? Okay, so remember Yahoo is a large shareholder in Alibaba. So Alibaba and Yahoo enjoyed a long honeymoon, but a surprise event in early 2008 brought it to a dramatic end. Microsoft made an unsolicited offer to buy Yahoo for $44.6 billion. If the deal went through, Jack realized Microsoft would become his biggest shareholder. That was a risk. The Chinese government had contacted Alibaba for comment about the possible change in ownership. Here's the reason why. Microsoft and the Chinese government had long enjoyed an unpredictable love-hate relationship. But there had been tensions too, with Microsoft expressing its exasperation at the rampant
1:31:07 David Senra? piracy, the piracy of its products, and the Chinese government accusing Microsoft of monopolistic behavior. So Bill Gates had maintained relationships with the president of China at the time, but publicly, they're also at each other's throats over China, you know, thinking Microsoft's a monopoly, and then Microsoft's trying to get some of their money back from rampant piracy. So in public, Jack insisted that Alibaba would remain independent regardless of what happened with the bid. Alibaba has been independent for nine years. No matter what happens, we will go in our own way. But in private, he was alarmed. Alibaba wanted to trigger the right-of-first offer clause in the 2005 deal, which allowed
1:31:50 David Senra? it to buy back Yahoo's stake in the event of change of ownership.
1:31:56 David Senra? In the end, Jerry Yang rejected Microsoft. So before I continue reading, just review what just happened. So there's this unsolicited offer. It's I think like a 70% premium over what Yahoo is currently trading for.
1:32:12 David Senra? So it might be good for eBay, or excuse me, for Yahoo and its shareholders. But it's a problem for Jack because the Chinese government is already asking about it. And if, based on what I'm reading in the book, once they start talking about it, like that's basically a way of them saying, hey, make sure this doesn't happen. So in the end, Jerry Yang rejected Microsoft's offer. Investors in Yahoo were furious as management had turned down an offer that valued the company at a 70% premium. So yeah, it did. Investors called for his head. Jerry announced he was stepping down as CEO, handing the reins over to Carol Bartz. Yahoo's decision to reject Microsoft had cost Jerry Yang his job and dented his pride. Yet Alibaba had dodged a bullet.
1:32:53 David Senra? So this Carol Bartz lady winds up being, she's a CEO for Yahoo for about three years. There's a bunch of stories in the book about her and Jack just don't get along. But I don't, I'm not going to read any of that. If you want to learn more, obviously, read the book. I do, because I want to focus. Now we've arrived at what I mentioned earlier is one of the craziest stories I've read. I still don't even understand how this happens. So this has to do with Alipay.
1:33:25 David Senra? And Alipay now is called Ant Financial. So just before I get into the story, just background. Ant Financial valued today somewhere in like the $40 billion range, if not more. It has about 50% share of the Chinese mobile payment market. So just keep that in mind when we're, when we get into the story here. So this crisis centered on who owned the Alipay business. Alipay was a critical cog in the Tobay machine, handling more than $700 million a day in transactions, more than half of the total market in China, and at one point had like 70% market share, but it's down now. But on May 10th, 2011, it emerged that Alipay asset had actually been transferred out of Alibaba
1:34:09 David Senra? Group that previous year. The business was now owned by a company personally controlled by Jack. It's called, the name's not important because the name changes so much, but the important part is Jack owned 80% of the company. And we find this out because there's this paragraph buried deep in one of Yahoo's quarterly earnings report, and this is what it reads. "To expedite obtaining an essential regulatory license..." Remember what I just said about the difficulty of maintaining a business with a strong central government of China? "To expedite obtaining an essential regulatory license, the ownership of Alibaba Group's online payment business, Alipay, was restructured so that 100% of its outstanding shares are held by a Chinese domestic company, which is majority owned by Alibaba Group's chief
1:34:54 David Senra? executive officer." So that's Jack, right? "A business potentially worth $1 billion just went missing." And that's, remember, it's more like $40 billion. "That evening, in an effort to limit the damage, Yahoo disclosed that neither it nor SoftBank had been told about the transfer of control until after the fact." So those are Alibaba's two largest shareholders. Alibaba also released a statement confirming the transfer and explaining that it was made to comply with the regulations from the People's Bank of China. People's Bank of China is going to be known from here on out as PBOC. China's banking regulator. Specifically, the PBOC had issued its administrative measures for the payment services provided by non-financial institutions. So that's just a list of regulations.
1:35:39 David Senra? "Which required..." This is the important part. "Alibaba explained, 'The absolute controlling stakes of non-financial institutions must be domestically held,' meaning that SoftBank and Yahoo could not have a controlling state." But there was a gap between the public statements from Yahoo and Alibaba, opening up a series of troubling questions that were essentially, "Who knew what when?"
1:36:03 David Senra? The Chinese business publication, I'm just gonna call it C because I don't know how to pronounce it. The Chinese business publication C confirmed after an investigation that Alipay was sold in two transactions in June 2009 and August 2010. And this is to the name of Jack's company, which is now Ant Financial. The firm controlled by Jack. The total price paid was $51 million. Okay, so I know this is a lot of numbers here, but let's focus on the important ones. It's saying they paid $51 million for a business at the time that was valued for at least a billion dollars, which is obviously way off, which today is valued around 40 to 50 billion dollars, if not more. Okay.
1:36:45 David Senra? Critics argued that Yahoo was either dishonest or incompetent. If Yahoo knew about the transfer, why hadn't they told their investors? If they didn't know about it, why not? Other troubling questions were also raised by the crisis. Did Alibaba really have no choice but to transfer such an important asset out of the company? Furthermore, did that transfer have to be made to a company under Jack's personal control? And what was gonna happen next? So this page, it's gonna get wild, but the note I left myself on this page was, the saying I always like to say, or the quote I love is, "History doesn't repeat, human nature does."
1:37:29 David Senra? And I don't think we're ever really gonna find out the truth here. I'm gonna tell you the story regardless, but
1:37:37 David Senra? I just think it's really hard when humans have
1:37:42 David Senra? an opportunity like this, where you can buy an asset that's not, I mean, you're buying something for $50 million that's potentially worth tens of billions of dollars. I just think that... You're gonna justify that in all kinds of reasons. Now, there is some regulations that we've talked about here and we're gonna continue to discuss. But my sense is just, aw, come on, man. You saw the opportunity, you just took it. Like, you're just justifying after the fact. I have no proof of that. It's just my personal opinion, based on observing humans, but, I don't know. Okay, so here, now we're gonna get some other people involved. Behind the scenes, when the crisis first broke, Jerry Yang was upset, but he remained calm.
1:38:23 David Senra? Masayoshi Son, however, remember, the head of SoftBank, was incensed. What was Jack thinking? To figure out what was going on, Jerry offered to fly to Beijing. Meeting there with a senior official at the PBOC, he was told that it was best to just accept the situation. When he pressed for an explanation, he was simply informed that the matter was out of their hands. So, "Accept the situation, and it's out of our hands, even though we're the ones writing the rules." Jack's defenders argue that he was simply first to see what the regulatory wind was blowing. Parking the Alipay asset into a domestic company that he controlled could insulate Alibaba from the risk
1:39:05 David Senra? that new licenses expected to be issued by PBOC would be denied to foreign invested companies. So, it's kind of like a rumor at the time. This may happen, it's probably gonna happen, but we're not, we're gonna actually be explicit in our intentions. And my whole thing about human nature repeating, because of all the businesses that you would own, Tabeo, Tmall, Alibaba, and Alipay, I have to think Alipay is gonna be the most valuable one. Assuming, at the time, it's dominating, it has, you know, 70-plus market share for the Chinese mobile payment market. So, anyways, Jack's defenders argue, so it was just basically smart by him.
1:39:45 David Senra? He saw all the regulatory winds, and he preempted this by making sure that it was 100% domestically owned. In an effort to clear up the matter in 2014 ahead of its IPO, Alibaba justified the transfer by explaining that the action enabled Alipay to obtain a payment business license in May 2011 without delay and without any detrimental impact to our China retail marketplaces or to Alipay. Indeed, Alipay, now entirely domestically owned, was the first of 27 companies to be issued licenses, and it was awarded the license number 001. But Jack's critics charged that because PBOC also issued licenses to foreign invested companies such as Tencent's Tenpay, that the argument that Alibaba had to transfer
1:40:30 David Senra? ownership of Alipay out of foreign hands doesn't hold water.
1:40:40 David Senra? To this, Jack's defendants argued that the comparisons with Tenpay and other foreign invested companies isn't valid. Because Alipay already had such a dominant share of the market, it could not have been expected such leniency. So see how they're kind of talking out of both sides of their mouth here? PBOC also issued a deadline, and this taking place in 2011, September 2011, for all companies to either obtain their own licenses or merge with an existing license holder. Companies that had operated in a gray area now found themselves being divided into black and white based on whether they had foreign investment and had obtained a license. Those that had not yet received licenses faced the risk of going out of business.
1:41:22 David Senra? In light of all this, was Jack justified in making the transfer of Alipay to his control? Or are those who to this day criticized the transfer justified? Both sides of the argument relied on their interpretation of what the Chinese government in the form of the PBOC had in mind. But that was as clear as mud. PBOC had never said that foreign invested entities could own payment platforms. But equally, it had never said that they could not. They argued by transferring an asset to a concern under his name for a price too low to be fair. So that's the main criticism of Jack. And that's why I'm just... Yeah, maybe you could use the excuse that PBOC is purposely opaque and you're reading the tea leaves better than anybody else, but you're also getting a hell of a deal.
1:42:06 David Senra? And so here comes the next note I had left myself was Beef with Mayoshi-san.
1:42:14 David Senra? And then, so this is Jack and Mayoshi-san getting into it. Jack said that today's situation is not designed by us, but we are compelled to do it. So his, his direct words are, "Hey, you know, I'm just reacting to what there's, uh, what's happening." "The complexity of decision-making of shareholders and the board is also a problem of corporate governance in the future." Interestingly, Jack revealed that Alibaba's relationship with Yahoo was stronger at that point than with SoftBank. This is Jack talking. "The problems between me and Yahoo are easy to solve. They are problems of interests. But the issues between me and Mayoshi-san are not only issues of interests. Beyond the Alipay dispute at the height of the controversy," Jack disclosed, "that he
1:42:58 David Senra? had fundamental disagreements with Sun on a range of HR issues, including employee incentive schemes and staff training." So now he's like airing out the internal disagreements between what an employee is and how they should be compensated. This is Jack talking. "He thinks that employees can be replaced at any time. I believe that we should give opportunities to young people in China, sharing the future with them. He thinks that's not the case in Japan. I pay you wages, so if you want to do it, that's fine, but if you don't, there will be others. First of all, I don't think what happens in Japan is necessarily right. Second, this is totally wrong in China. I believe customers first, employees second. We shouldn't have this company, we couldn't have this company without our staff.
1:43:43 David Senra? We have completely different principles on this issue. The issue has been there since day one." Jack revealed that his disagreement with Sun was, was longstanding, that he'd been fighting over it regularly in the past few years. Jack also contrasted his approach to equity ownership. "17,000 employees at Alibaba have shares," he said. You see that from day, from that day... You see that from the day that Alibaba was established until today, my share has been getting smaller and smaller. Jack argued that Sun, by contrast, had a stake in Alibaba of 30% from day one, and now it is over 30%. In a sign of the tension that had erupted between the two men, he invited journalists to look at Sun's approach
1:44:28 David Senra? to his own employees at SoftBank. You can check if he's given anything to his employees. If he, meaning Sun, is asked to take out 1% of his stake, it's like pulling out a tooth from a live tiger. While Jack professed his admiration for Sun's skills of negotiation, he also said Sun is the world's number-one iron rooster, a Chinese idiom describing people who are extremely stingy, meaning there is no chance whatsoever to pull out even one hair from an iron rooster. So a few months later, Yahoo, benefiting through its continued stake, they come to an agreement, would receive compensation of $2 to $6 billion
1:45:11 David Senra? from the proceeds of any future IPO of AliPay. So the book doesn't go into whether SoftBank got any more money, but we know that Yahoo gets anywhere from $2 to $6 billion. But again, so it went from $51 million, now way up to $2 to $6 billion. And today, that company is valued way more than that. So that's the conclusion of just one of the strangest stories. We don't actually figure out what the actual truth was. We just hear both sides. No one ever says anything else, which I think is very bizarre.
1:45:44 David Senra? I just, that's, I don't know. It boggles my mind that that happened. It's just a weird occurrence of events with all these different parties. You have Yahoo in the United States, Mayoshi Sun in Japan, you have Jack running Alibaba business in China, and then you have the Chinese government. And I don't know. It gets really confusing. And I think it kind of leads, there's a paragraph towards the end of the book that I want to share, and it's Jack just talking offhand. And I think it's kind of revealing. And he says, "Jack also discussed the strain of running a public company. He complained that his life after the IPO was more difficult than before. And then here's an important part. And that if I had another life, I would keep my company private."
1:46:32 David Senra? And I'm gonna close here. I just love this last sentence. "One leading Chinese internet entrepreneur put it to me like this. Most people think of Alibaba as a story. It is not just a story, it is a strategy." And that's definitely what I took away from the book. The main point is that there's many different paths to running a successful business. And your choice of the path, to me, is the strategies that you choose. And Alibaba has very unique strategies. And now, today, interesting enough, I read that in addition to all the businesses they
1:47:15 David Senra? own, as I mentioned, the duopoly between Tencent and Alibaba, that's only further exacerbated since the events that took place in this book. Like I said, the book was written a few years ago. I read that now 80% of all the valuable tech companies in China, meaning tech companies founded in China and being worth more than a billion dollars, 80% of them have received funding from either Alibaba and Tencent. So Alibaba's kind of, not only are they going and dominating other markets, but they're kind of emulating what SoftBank does and how SoftBank has generated the wealth they have. So in any case, if you want the full story, as always, read the book. It's very interesting. It's like a seven, eight hour read. It's about 300 pages.
1:47:59 David Senra? I'll leave a link down in the show notes. And that's it. Thank you very much for your time. Hope you found this information valuable and I'll talk to you again next Monday.
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